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1. Oil and the Global Economy

Last week was one of the more volatile ones in recent memory with NY oil prices gyrating between $85 and $75 a barrel in the wake of the S&P downgrade of US debt. In London, Tuesday was the day of greatest volatility with oil moving between $106 and $98 a barrel. By week’s end some recovery had taken place with NY oil closing at $85.38 and Brent at $108.03. In the last few weeks, NY oil has fallen roughly $14 a barrel and London oil $10 a barrel. In the last two weeks, gasoline futures have been as high as $3.15 a gallon and as low as $2.60 before closing on Friday at $2.81 a gallon – some 30 cents a gallon below the highs seen in July.

In addition to the emotional sell-off on Monday and Tuesday, last week saw a series of troublesome economic reports suggesting tougher times ahead in the US and Europe. The week also saw new forecasts by IEA, EIA and OPEC suggesting that, unless there is a major economic downturn in the offing, current trends indicate that oil supplies will be inadequate to meet demand in the near future..

Last week’s US oil stocks report showed an unexpected decline of 8.2 million barrels in total US commercial inventories. Over the last four weeks US crude imports have been running some 700,000 b/d lower than last year resulting in a gradual drawdown in US stockpiles despite the release of crude from the Strategic Reserve. In Paris, the IEA reported a counter-seasonal drawdown of 18 million barrels in OECD stockpiles during June.

Beijing reported year over year jumps in July exports and imports of 20.4 percent and 22.9 percent respectively – suggesting that its economy is still growing apace. China’s oil imports were down to a nine-month low of 4.6 million b/d in July vs. 4.8 million in June and 5.1 million in May. Analysts point out, however, that several large Chinese refineries are down for maintenance and that the Chinese usually slow purchases during periods of higher crude prices. An industry consultant reports that China will drastically cut gasoline exports in the 3rd quarter due to domestic shortages.

2. The Oil Market Report for August

In this month’s report the IEA markedly changed the tone of its supply/demand forecasts for the next 18 months. In recent issues, the Agency has been warning that OPEC was failing to produce enough oil to keep up with the growth in demand and had convinced several OECD members to release a total of 60 million barrels from their strategic stockpiles. While the new report still considers it likely that there will be a supply crunch in the near future, it now recognizes the possibility that growing economic problems across the OECD and Asia could push global economic growth below the 4.2 percent for 2011 and the 4.4 percent for 2012 forecast by the IMF. A decline in the global growth rate to 3 percent could cut the increase in the demand for oil next year to 600,000 b/d from the currently forecast 1.6 million b/d.

Despite a cut of 60,000 b/d in demand and a 600,000 b/d increase in global oil production during July, the IEA is still officially forecasting 2011 global demand to average 89.5 million b/d to be covered by an average supply of 88.7 million b/d with the 800,000 b/d difference to come from global stockpiles.

The increase in Japanese demand for imported oil to replace widespread outages of nuclear power generation may reach 230,000 b/d this year and 270,000 b/d next.

Among the headlines generated by the report was the IEA’s assessment that the Saudi’s increased their production in July by 110,000 b/d over June to 9.8 million b/d, the highest since 1981 following the ouster of the Shah of Iran. OPEC crude production, however, is still below pre-Libyan uprising levels.

Problems stemming from the trade embargo seem to have lowered Iranian oil production in July to 3.5 million b/d, the lowest in eight years. Tehran is still having troubles working out payment schemes with foreign customers such as India and South Korea.

Global stockpiles fell by 11.8 million b/d in June while the average for the month is a 1.8 million barrel increase. Preliminary data shows an increase of 18.5 million b/d for July which is well below the recent average of a 27 million barrel increase for the month. Short term floating storage continues to fall. Overall, the IEA’s assessment is that global supply is not currently meeting demand and that global stocks are being drawn down to meet the shortfall.

3. Fracking for shale gas

The natural gas subcommittee of the US Secretary of Energy’s Advisory Board issued a report last week recommending measures to reduce the environmental impact and improve the safety of shale gas production. The report noted that given the rapid development of shale gas and the potential for further increases, public concern has also grown rapidly.

The subcommittee found that

  • There is a possibility of drinking water pollution from methane and chemicals used in fracturing fluids
  • Air pollution from leaking methane may be the most serious problem;
  • There is community disruption during shale gas production;
  • There are cumulative adverse impacts that intensive shale production can have on communities and ecosystems.”

The subcommittee points out that, unless safety and environmental issues are addressed quickly, public opposition will likely grow, and could well put continued production at risk.

While public concern is focused on leakage of chemicals in drinking water, the committee believe that uncontrolled emissions was a more serious problem that needs to be dealt with immediately. While the committee believes that there was little threat to drinking water from the insertion of chemicals into the ground during the fracking process, it was noted that in the Marcellus shale, some 20-40 percent of the fracking fluid is forced back to the surface where it can make its way into the water table unless carefully controlled.

The report recommends that regulators should take immediate steps to control emission from shale gas wells; the drillers should disclose the contents of the fluids used to fracture the wells and that further study of the water pollution issue be undertaken.

Quote of the week

“People are naturally much more responsive to finite resources than they are to climate change. Global warming is bad news. Finite resources is investment advice.”

— Jeremy Grantham, quoted in a NYT profile

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

  • Royal Dutch Shell announced that it is working to stop a leak at a North Sea oil platform. 113 miles from Aberdeen, Scotland. (8/13, #14 #15)
  • Turkey says an explosion at a pipeline has temporarily cut natural gas supplies from Iran. The governor’s office for Agri province, where the explosion occurred, suspects Kurdish rebels of sabotaging the pipeline. (8/13, #5)
  • By booting out Shell in 1993, the 500,000 inhabitants of Nigeria’s Ogoniland hoped to take the first step towards cleaning up their oil-polluted land. Almost 20 years later, a new report from the UN says it could take 30 years and at least $1 billion to rid the poisoned mangroves of a thick, black carpet of crude. (8/12, #7) (8/13, #6)
  • Venezuelan President Chavez said his body was reacting well to the second round of chemotherapy treatments he had been receiving in Havana. (8/13, #7)
  • Japan will get the biggest share of the Saudi Arabian crude oil cargoes loaded in the week ended Aug. 6, according to ship-tracking data compiled by Bloomberg. (8/13, #10)
  • A multibillion-dollar gasoline tax to maintain U.S. highways and mass transit will be in jeopardy when Congress resumes in early September. An 18.4-cents-per-gallon gasoline tax is set to expire on September 30, but the deadlocked Congress has been unable to advance legislation to extend the tax. (8/13, #11)
  • The abundance of crude oil in the central US has padded the profits of many refiners this year, but the good times might not last much longer. The midcontinent oil glut has been shrinking as Midwest refiners run at near-maximum capacity. (8/11, #8)
  • Indonesia’s crude oil production will continue to decline in the absence of any significant new projects. Output is projected to fall another 6 percent next year to 860,000 b/d according to the IEA. (8/11, #20)
  • Big tractor-trailer trucks will have to get 20 percent more miles per gallon by the 2018 model year under the first-ever fuel economy rules for heavy vehicles announced by President Obama. (8/11, #28)
  • In the Netherlands, tests have begun for a controversial government tax proposal which would use internet connected meters to charge drivers additional fees for miles driven. The meter also factors in the cost to society in the form of pollution, traffic congestion, greenhouse gas emissions and wear and tear on roads. (8/11. #30)
  • Food futures surged after the US government slashed its forecast for the country’s crops due to the impact of a heat wave and drought. “Unusually high temperatures and below average precipitation during July across much of the Corn Belt sharply reduced yield prospects.” (8/12, #6)
  • Japan’s 10 major power utilities consumed 14.4% more oil and 23.4% more LNG in July compared with a year ago, and bought 51.3% more crude and fuel oil and 25% more LNG during the month.. (8/12, #11)
  • The Japanese government on Friday lowered its economic growth forecast for fiscal 2011 to 0.5 percent — one percentage point lower than previous estimates, local media reported. (8/12, #12)
  • Mismanagement and bureaucratic deadlock in Iraq’s electricity ministry have short-circuited a quick-fix plan for some 50 power plants to alleviate the country’s severe power shortage. (8/10, #12, #13)
  • Many Ghanaians who use propane in their homes are expected to go without the product for at least one year or more as shortages increase. (8/10, #16)
  • The board of Rockhopper Exploration considers the company’s Sea Lion oil discovery in the North Falklands basin in the South Atlantic to be commercial. (8/10, #20)
  • Iran‘s new oil minister says the country’s Revolutionary Guard’s economic conglomerate should replace foreign oil and gas companies in support of Iran’s oil production. (8/9, #8)
  • Jordan said it will announce in November the firm it has chosen to build the first nuclear plant to meet growing energy needs and desalinate water. (8/9, #10)
  • Tokyo Electric Power. said it logged a massive $7.4 billion net loss for the three months through June, with its red ink snowballing on higher fuel and compensation costs as it continues to grapple with the Fukushima Daiichi nuclear disaster. (8/9, #21)
  • Some of the 30-plus deepwater rigs that were in the Gulf of Mexico have moved to other markets, first because of a US halt called in May 2010 after BP Plc’s well blowout, and then because of the lack of permits in the months after the moratorium was lifted. (8/9, #25)
  • Libya’s rebels are close to establishing an oil-protection force to ward off forces loyal to Gaddafi, as they seek to restart crude production and generate cash. Previous statements from rebel officials indicating the probable resumption of production in the eastern oilfields have been followed by sabotage by pro-Gaddafi forces roaming the deserts. (8/8, #8)
  • An official said that China will continue its efforts to regulate the rare earth mining industry during the second half of this year. (8/8, #11)
  • Norwegian oil and gas company Statoil said it has made a significant oil discovery in the North Sea. Preliminary estimate are for between 200 and 400 million barrels of oil equivalents and the firm expects additional gains north and south of the discovery. (8/8, #15)
  • The electric wind turbines built 30 years ago often experienced serious problems, but the technology has come a long way in recent years, and wind farm operators have learned new procedures, like the importance of shutting down the machines in high winds and the best places to put them to begin with. The turbines also have grown larger and more effective (8/8, #18)